Bridging the Yen Divide

A split back-office infrastructure across yen and non-yen business can increase costs and prevent brokers from delivering on client demand for greater service. The issue is greater than a duplication of technology.

A split back-office infrastructure across yen and non-yen business can prevent brokers from delivering on client demand for greater service.

Servicing Japanese clients who wish to invest both domestically and internationally may appear unified to the customer, but behind the scenes operations are very siloed. That has an impact on the costs of operations, which in turn hurts a bank’s competitiveness. As volumes increase, profits do not see a proportionate rise.

For investors, domestic and international, Japan is looking interesting. In 2017 real GDP is estimated to have risen around 1.8%, according to analysis by research house TH Real Estate, which reports that a range of economic activity indicators suggest that the Japanese economy “is in its best health in many years, and the strengthening in momentum is well underpinned and has legs to stand on for some time.”

However, for brokers and banks trying to facilitate investment into, out of and within Japan, it can look expensive. Historically, yen and non-yen business activity has been operationally segregated. Middle- and back-office operations are managed using separate technology stacks and different teams. Where efficiency gains are made on one side, the other receives no benefit.

The issue is greater than a duplication of technology. Both teams need different training and skills in order to use the systems, representing additional outlay and reduced/limited crossover support. Where the outputs of both systems do need to be integrated for accounting and risk purposes, firms face the additional complexity of aggregating normalizing data it in order to make it usable.

EPFR Global, which tracks investment flows, reports that inflows into Japanese equity funds in Q1 2018 reached nearly US$6 billion, matching those seen after the “Abenomics” policy was announced in 2013. As interest in the economy grows, the potential for generating returns also increases. Strengthening consumer spend and the 2020 Olympics in the medium term may give the country a bullish outlook on many levels. Investors in Asia have a diverse risk appetite and they will look across domestic and international markets. Brokers must respond to this demand and support higher activity levels.

Yet there is a bottleneck on their ability to respond. The number of clients that firms can potentially win has plateaued, and brokers are finding it increasingly hard to gain new business as a result. This has several demographic reasons, including Japan’s reducing population. That is already hitting the financial sector. Regional banks are struggling to survive. For international brokers, potentially, an increase in servicing costs, matched with a freeze on returns, could start to reduce profitability further.

They have two options which would reduce this burden: First, they can increase the amount of business they are doing with existing customers to increases their wallet share; second, they could reduce their underlying costs, to make their business more profitable.

Under the first option, a broker seeks to capture as much of a client’s wallet share as possible by handling both national and international business, reflecting the client’s appetite for risk across different markets.

To increase its capacity to service clients, it has to scale up its processing in the middle and back office, to better manage the business being done in the front office. That can be achieved by throwing manpower at the problem. Within Japan, domestic banks often adopt that process to achieve the necessary effect. Although that has the advantage of supporting local jobs growth, for international firms competing against other international rivals, it is necessary to achieve a comparable level of return on equity.

To meet that competitive level requires automation of low-touch processes, in order to reduce the cost of scaling up the business. However, if two technology stacks are supported across yen and non-yen business, this automation takes on an added level of complexity and cost.

Under the second option of decreasing costs, the firm must again look for efficiency gains in the back office. Although many firms have upgraded existing systems to cope with the move to T+1 settlement and the JASDAQ migration to the IS0 20022 messaging standard, the underlying technology will still represent a yen/non-yen divide. As investment fundamentals change, the ability to share computer resources and infrastructure from one side of the business and the other is limited.

To meet growing demand head on and win business, sell-side firms must consolidate middle and back office under a single system. Not only does that provide efficiency in the fixed costs of deployment, it mutualizes ownership of resource so that as domestic and international business ebbs and flows, the cost base is able to reflect that.

The customer-centric approach to business builds relationships without information silos, in order to best match products with clients at the right time. To increase customer centricity in a broker’s Japanese business, it must be a lean operation, based on a single technology platform, serving investors in the local market and reaching further afield in the Asia Pacific region, in the US and in Europe. With that flexibility underpinning it, it can grow through a tighter, more expansive client relationship.